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C/o Joshua London

Why Does Wine Cost What it Does?

Ever wondered why a bottle of wine costs what it does? One of the perennial complaints among kosher wine consumers is the general rise of kosher wine prices. The question remains a good one: why does this wine cost what it does?

Jeff Morgan, the vintner and co-owner of the kosher Covenant Winery in California and Israel, recently addressed this question in a blog post on the Winery’s website called “Truth in Wine: what is a bottle of wine worth?”

Morgan began his post by offering the safest and surest advice on wine buying. His “secret to success as a wine consumer” is not to “buy wines I can’t afford” and not to “drink wines I don’t like.” I too have advocated the same for as long as I’ve been writing about wine and drinks.

At any rate, Morgan tackles the “truth” about wine prices by clearly explaining some of the factors involved.

The United States market for alcoholic beverages is structured around what is called the “3 tier system” of distribution to the consumer—the late great importer Joe Dressner used to call this the “three tier schnook system.” The three tiers are (1) importers or producers, (2) distributors, and (3) retailers.

Typically, the producer or importer sells to a wholesale distributor, who in turn sells to restaurants and retailers, who then sell to consumers. Each tier needs to make a profit, so they price the wine based on the cost of the previous tier, with the increments determined by market forces.

Wineries typically sell to distributors at half of the final retail price. This is known as the FOB, or “freight on board,” and represents the costs associated with the product until it is delivered to its designated destination is counted in the distribution tier in the three-tier system. The FOB price is all that the winery will get per bottle out of the entire arrangement, and therefore must encompass all of the winery’s costs like running the vineyard, facilities, equipment, staffing, and a margin of profit.

Making wines in one region over another, using one varietal of grape over another, buying from one vineyard over another, or aiming for one level of quality over another, can push you into higher-priced territory just to cover some of the costs.

Putting the proper FOB together can be as much art as science, given the many variables of the wine industry.

For example, if the FOB is $20—that is, the distributor pays the winery $20, the distributor will then sell to the retailer or restaurant at about a 33% markup, or $27. The retailer will then add roughly a 50% markup on his cost. So, a $40 bottle of wine at your favorite wine shop represents $20 to the winery. Restaurant markups vary widely, but are often twice the retail price—so that $40 bottle might be $80 or so in a restaurant. The winery will still only clear $20 for the bottle.

From a consumer standpoint, buying wine can be confusing when prices range from the $8 Don Alfonso Merlot from Chile ($7.99 from Skyview Wine & Spirits) to the nearly $300 Herzog Generation VIII Cabernet Sauvignon Padis Vineyard Napa Valley 2014 ($289.99 from Skyview).

The cost of the grapes can vary quite dramatically, also driving up the price. As Morgan puts it, “Napa Valley Cabernet grapes can cost 10 to 20 times as much as Lodi Zinfandel grapes, for example. Why? It’s partly supply and demand. And it’s also partly a reflection of quality—or at least perceived quality. The same applies to wine or grape prices from the best appellations in Bordeaux or Burgundy. Reputation and location have a lot to do with it.”

As Morgan notes, “as a general rule, $10K/ton of [Napa Valley Cabernet] grapes translates to $100+/bottle price. In this scenario, the winery is really only getting about $50/bottle.

“With all the variables,” notes Morgan, “it’s impossible to say with any certitude what profit a winery is going to make on this wine. But it’s very possible that the total investment in that bottle—given all the costs of doing business—is perilously close to the price that the winery charges for it.” This is to say, it’s a tough racket to do well in.

Elsewhere online I’ve seen estimates that when demand is very high, and business is booming, a commercially successful winery’s profit margin could be 30-50%, but when business is low and slow, the profit margin could be 0-15%. Even still, the variables can, alas, be high and punishing.

“Suffice it to say,” Morgan adds, “that I’ve been in the wine business for nearly 30 years, but I have yet to make any ‘easy money.’ In fact, for the first 10 years of Covenant, I made no salary. Instead, I made wine for other people and wrote books to make ends meet.” Even though some wineries get lucky and make good money quickly, “the rest of us,” he says, “are generally happy to stay afloat and make wines we are proud of—at a number of different price points.”

As I write all this, I drown my complaints with a glass of Covenant Napa Valley 2014 ($100): A superb blend of 57 percent cabernet sauvignon, 31 percent merlot and 12 percent petit verdot, this complex wine offers a bit more upfront finesse than more usual 100 percent cab offerings, with notes of black currant, black cherry, blackberry and thyme, a little spice, subtle espresso and delicate vanilla oak. Very drinkable now with a little air, but should cellar for the midterm. Absolutely worth the price, if you can afford it or, if you, like me, have generous friends with deep pockets who share.

L’Chaim!

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